Many law firms appear to be in denial about the need to adjust their strategies to new market realities, according to a new report.

Perhaps these firms and their lawyers believe the world will go back to normal, according to the report (PDF) by the Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Peer Monitor. The report is not so optimistic.

Partner profits grew by a mere 3.58 percent last year among 130 mostly large law firms in the Peer Monitor database, the report says. Lawyer productivity is lackluster, realization rates are at historic lows, and competition is increasing. The Am Law Daily and the Wall Street Journal Law Blog (sub. req.) summarize the findings.

“During the past four years of the economic downturn,” the report says, “it has become increasingly obvious that many law firm partnerships have experienced mounting stress relating to compensation, the reductions in the ranks of equity partners, the treatment of lateral partners, and the management of partner expectations. And the combination of all of these factors—coupled with a growing sense of disenfranchisement—has resulted in partner morale problems in many firms.”

Morale is especially bad among “homegrown” partners who perceive laterals are being paid disproportionately for similar books of business. Other homegrown partners who are not regarded as significant rainmakers often complain they are removed from power centers and treated more like employees. Part of the problem, the report says, may be unrealistic compensation expectations.

To adapt to market realities, the report says, law firms will have to differentiate themselves from the competitors and respond to demands for more efficiency. That may mean jettisoning “the traditional model of a law firm consisting only of partners and partners in waiting” in favor of alternative staffing approaches that may include staff attorneys, nonpartner track associates, contract lawyers, and part-time lawyers, the report concludes.

The Law Blog and the Am Law Daily contrast the report with more optimistic news. A survey of mostly large law firms by Wells Fargo Private Bank’s Legal Specialty Group showed better-than-expected results for 2012, including an average 5 percent increase in gross revenues and a 5 percent increase in profits per equity partner. And several BigLaw firms reporting financial results to the American Lawyer are doing better than that average.